Why Exxon Is Our Preferred Major
Third-quarter results highlight the firm's competitive advantages, portfolio improvements, and financial performance.
ExxonMobil (XOM) sets itself apart from the other majors as a superior capital allocator and operator and has historically delivered higher returns on capital relative to peers. The firm's strong third-quarter results demonstrate the competitive advantages, underlying portfolio improvements, and financial performance that make it our preferred major. First, we have long pointed to Exxon’s downstream operations (refining and chemical) as a competitive advantage that sets it apart from peers. This advantage was on display during the quarter as increases in downstream earnings offset lower upstream earnings, resulting in higher firmwide earnings despite lower commodity prices. Second, despite the lower total upstream earnings, unit margins are improving as liquid volumes increase as a portion of the portfolio. Total production slipped 4.7% from the third quarter last year. However, this includes the loss of low margin volumes from the UAE due to the concession expiring. Excluding these volumes, production fell only 1.0%, with liquids growing 0.6% and gas production falling 2.9%.
Earnings per barrel remained flat at about $18/boe despite a $9/bbl slide in oil prices. The improved margins are even more apparent when measured over the first nine months of the year. Despite oil prices averaging $2/bbl less, earnings per barrel year to date were $21/boe compared with $18/boe over the same period last year thanks to portfolio high-grading and the addition of higher margin production. Finally, the company is free cash flow positive, as cash flow from operations and proceeds from asset sales exceeded capital spending and shareholder distributions through the first nine months of the year. We expect these trends to continue in the coming years as improving upstream margins, a strong downstream segment, and lower capital spending combine to grow free cash flow (excluding asset sales). Combined with an attractive valuation, Exxon continues to rate as one of our preferred plays among the major integrated group.
Allen Good does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.